Sometimes it’s the simplest things that make the most difference/impact.

Take for example the daily VIX – Volatility Index – and its 200 day Simple Moving Average:

While there are other standard indicators on the chart, let me call your attention to the flat red line – the 200 day simple moving average.

The VIX broke sharply through the 200d SMA initially in April 2010 and in a big way early May (think “Flash Crash”) as Volatility Surged and price (stocks) collapsed.

The VIX fell to the 22.50 level again – 200d SMA – but this time the average provided support as the VIX made it back to 37.50.

The 200d SMA provided minor support until price cleanly broke the level (making a new low) in September, at which point the average then switched over to providing resistance/peaks for the VIX.

Through 2011, the VIX has remained under the 200d SMA and just recently, the key average repulsed a rally again to 22.50 – turning back the VIX dead in its tracks.

So the main idea here is to watch the VIX relative to its simple 200d SMA:

A breakout above 22.50/23.00 could be treated as a major trend reversal signal that could lead to another spike in volatility – but of course watch for the triple-stock market indexes to break their key daily support (1,300/1,280 in the S&P 500, for example).

Until then, expect Volatility to be contained under this level and for the VIX to decline particularly in the event the triple-indexes break above their recent new recovery highs (including 1,345 in the S&P 500).

Corey Rosenbloom, CMT
Afraid to Trade.com

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